by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on the latest US proposal to Iran. We then turn our attention to signs that the Fed is growing increasingly divided. After that, we briefly address the rising trade tensions between the EU and US, China’s decision to uphold US sanctions, and the EU’s progress in developing its own weapons. As always, we include an overview of recent domestic and international economic data.

Iran Deal Nearing: The United States and Iran appear to be moving closer to a deal that could end the standoff in the Strait of Hormuz. On Wednesday, reports indicated that Iran is reviewing a one-page memorandum outlining a framework for the gradual reopening of the waterway. The proposal is intended to break the current impasse, as both sides seek to ease mounting economic pressures while continuing negotiations over a broader nuclear agreement. Ongoing progress in talks is supporting market sentiment, with signs of escalation continuing to recede.

• While Iran has not yet made a final decision, internal divisions appear to be slowing progress. Moderate factions worry that a prolonged conflict and continued blockade will intensify domestic political pressure. In contrast, hardliners argue that the White House may also be under pressure to secure a deal, potentially strengthening Iran’s negotiating position. For now, it remains unclear which side holds the upper hand.
• Washington, however, appears ready to pivot as it looks to refocus on negotiations with China. The White House had postponed talks due to the conflict but is now expected to resume discussions later this month, likely covering trade, investment, and broader foreign policy issues. The shift comes as both countries continue to position themselves to gain leverage in the negotiations.
• Progress in talks with Iran, alongside a renewed push toward negotiations with China, should help reduce overall market uncertainty. If the White House is able to reach agreements with both counterparts, it would likely support risk sentiment and could pave the way for a gradual rise in asset prices over the coming months. However, we could see a return of volatility if there are setbacks in either case.
• While the outlook is improving, there are still signs the market may be underpricing near-term risks. In particular, food and energy prices are likely to remain affected by the conflict for longer than currently anticipated, which could weigh on earnings in the current quarter. That said, we view these pressures as largely transitory and not sufficient to push the economy into recession. In this environment, increasing exposure to value-oriented assets may help provide a buffer within portfolios.

 Fed Becoming Divided: Just a week after Fed Chair Jerome Powell held his final press conference at the Federal Reserve, several Fed officials have begun voicing concerns over rising inflation. This week, St. Louis Fed President Alberto Musalem and Chicago Fed President Austan Goolsbee both signaled unease about increasing price levels. Their worries have, in turn, fueled concerns that Fed officials may not be ready to cut interest rates this summer, even as incoming Fed Chair Kevin Warsh is set to take office later this month.

• The Chicago Fed president’s primary concern centers on a potential timing mismatch. He has argued that the AI-driven investment boom, alongside stronger consumption, could elevate demand before productivity gains are sufficient to offset it. In such a scenario, he suggested the Fed may need to consider future rate hikes rather than easing policy.
• While Musalem struck a more measured tone on the rate outlook — emphasizing that policy could move in either direction — he also flagged potential inflationary risks stemming from AI. In remarks to the Mississippi Bankers Association, he noted that the AI-driven expansion, alongside factors such as fiscal policy, monetary policy, and elevated equity markets, appears to be contributing more to current inflationary pressures than traditional drivers like geopolitical developments and trade shocks.
• Comments from Musalem and Goolsbee likely reflect a widening divide within the FOMC as it prepares for a transition to presumptive Fed Chair Kevin Warsh. Warsh has previously argued that the Fed should be more willing to adjust rates to support the supply-side benefits of AI. However, that stance may prove difficult to sustain if policymakers conclude that rate cuts risk amplifying inflationary pressures, particularly if productivity gains lag behind demand-driven effects.
• Given the divergence in views on the inflation outlook and monetary policy, we continue to expect elevated volatility in longer-duration securities. The 10-year Treasury yield is currently hovering near the upper end of its roughly 4.2%–4.5% range from the past 18 months, suggesting some near-term scope for a bond rally. However, a sustained bull market in bonds will likely require greater clarity on the policy path and increased confidence that inflationary pressures are easing.

EU Not Aligned: The EU has struggled to secure consensus among member states on implementing the framework outlined in President Trump’s trade deal. The dispute stems from the bloc’s failure to follow through on proposed legislation to eliminate tariffs on US industrial goods in exchange for a US commitment to cap tariffs at 15%. In response, Washington has threatened to impose tariffs of up to 25% on EU auto imports. While tensions appear contained for now, underlying trade frictions continue to build.

China Complies: Beijing has reportedly instructed its banks to halt lending to refiners that violate US trade sanctions, reversing guidance issued just a day earlier. This abrupt shift may signal an effort by Chinese authorities to de-escalate tensions ahead of scheduled talks with the US later this month. If sustained, the move suggests Beijing could be positioning itself to take a more constructive role in easing trade frictions during upcoming negotiations.

EU Defense Missiles: The German defense group Rheinmetall has announced progress in developing deep-strike weapons. The company states that it can develop cruise missiles as well as rocket artillery and expects to begin development later this year or early next. This rise in weapons manufacturing comes as European nations accept that they must build up their own defense capabilities to fill the void left by the United States taking a less hands-on role within NATO. We continue to believe that this shift should benefit European defense companies.

View PDF